How technology is opening up single-family rentals as an emerging asset class for investors.

Today, technology plays an integral role in society, heightened ever more by the global pandemic. Traditionally rooted, the real estate sector is one of the last industries to witness the rise and adoption of tech, but this is dramatically changing. 

Within the residential sector there is an evident under-supply of housing which has resulted in a subsequent lack of sufficient rental stock. Could the institutionalisation of the rental market help address the problem?

The residential category has always been largely admired by institutional investors for its stable returns and low-risk profile. With the pandemic, the demand for Resi has grown rapidly, given the challenges for other RE asset classes and negative yielding bonds. But Resi has always faced a problem with scalable supply, given 98% of the housing stock in Europe is largely inaccessible to investors. Until now. 

Through advanced technology, investors can now access previously undiscovered markets, such as single family rentals (SFR), which would otherwise be too operationally intensive to execute. Unlike investments in apartment building complexes or multi-family homes (MFH), a SFR refers to a stand-alone house or apartment, which may come with a garden, garage or some additional space. 

The investment plan for SFRs is simple: buy a property, refurbish it to enhance its value and rent it over a long period to establish a rental income while gaining from capital appreciation.

In the current market, institutional investors could only target approximately 2% of the housing stock by primarily focusing on MFH and build to rent (BTR). Capital allocation for residential investment has also been limited to sub-sectors, such as co-living and student accommodation, but SFR presents an untapped market for European investors. However, to deliver these portfolios at scale, current investment models are both high risk and high cost, with long development cycles. SFR has the potential to be an investment category of $42t, but why has it been so difficult to unlock this emerging asset class? 

The problem for institutional investors is that their ability to deploy capital at speed, scale and at the right price is massively restricted when it comes to SFR. The extensive processes and small ticket size associated with these transactions contribute significantly to an arduous ordeal and only a data-led investment strategy has the potential to expose the supply of assets, enabling the ability to source directly from consumer sellers at scale.

Unique AI-enabled platforms for real estate investment and asset management can unlock the previously inaccessible 98% of residential opportunities.

Since the 2008 housing crisis, several US-based asset managers, led by Blackstone through Invitation Homes, were able to source and assemble large portfolios of SFR to provide institutional access at scale. 

Now, breakthrough technology has emerged that enables platforms to open up SFR to the UK and European markets without waiting for a housing downturn. Driven by humans, powered by technology, such unique models source, underwrite and structure SFR portfolios, delivering strong returns and best-in-class property management for dispersed portfolios at speed. This is a concept which would be too operationally and logistically intensive to deliver without a team of data scientists and experts. Working with extensive proprietary and third-party data, opportunities are secured to formulate key hyper-local market insights. As a result, investors can subsequently expect lower risk and increasingly diversified portfolios, which thus accurately target and deliver stable returns.

Innovative platforms, such as IMMO Capital, which is the first of its kind in Europe, ensure that the entire value chain is managed all the way from capital allocation through to the asset management level. Powered by machine learning, models identify single assets at scale and speed that no human team could achieve. The digitisation of the process allows investors to find assets that offer value-add opportunities that are mis-priced and can underwrite in a matter of minutes. The rise of technology is vital in deploying capital at speed and scale, because it enables a multi-pronged approach to sourcing residential assets. 

Through building these types of SFR portfolios, the investor community is more likely to provide accountable tenant experiences as landlords are incentivised to protect a brand. Digital marketing and tenant platforms connect the consumers directly to the landlord. Expert human-led inspections guarantee a rigorous self-assessment of properties, while the technology is able to capture hundreds of physical data points per asset. This allows companies to monitor things such as moisture, heat, electrics and asbestos, which are standardised and written into the underwriting process. Furthermore, the long-term value of properties and their income generating potential, such as the proximity to transport hubs or outstanding schools, are assessed, thus helping to support investors in finding the best places to develop and regenerate.

The Covid-19 pandemic has rapidly escalated levels of virtual due diligence in the real estate industry. This has caused market leaders to reevaluate the core fundamentals that are underpinning the sector. Given the instability of the past year, security and longevity are now extremely sought after by investors to generate consistent and secure returns. 

Furthermore, it has enhanced and facilitated the shift in perception for institutional investors on the salient issue of ESG. Fortunately, SFR is aligned with this change, because the model recycles existing housing stock, which helps to drastically cut its carbon footprint, making it an attractive portfolio to investors. 

“Powered by machine learning, models identify single assets at scale and speed that no human team could achieve”

With a vision for the future, IMMO’s technology is helping to change and deliver transparency within an otherwise outdated, time-consuming and manual world. Opening a black box of automated valuation models, data-driven frameworks and machine-learning algorithms – covering property sales, legal, refurb and the leasing process – their technology is seamlessly supporting human decisions based on traditional and non-traditional market information, coupled with expert due diligence, to create a holistic SFR platform for institutional investors, thereby providing much desired, scalable exposure in residential real estate.